•That the campaign is
seeking concessional special tax treatment for KiwiSaver
investment and term deposits.

•That these tax
concessions would be at his cost.

•It is too complicated
to exempt the inflation component across the whole tax
system.

He concludes by recommending:

•We should
discuss lifting access restrictions so that savers could
withdraw their savings if they need to.

The
proposed tax changes are not a concession, they remove
excessive taxation

Rather than introducing a
concession for KiwiSaver and term deposits we are proposing
to remove the excessive taxation on their investment income.
Over recent years the Treasury, the IRD and the Savings
Working Group set up by the Government in 2010, have raised
the over-taxation of compound interest products as an issue
to be addressed as a barrier particularly affecting the
savings of New Zealanders who are on lower incomes or who
are more risk averse.

With respect to the taxation of only
the real component of interest, last year the Retirement
Commissioner also recommended to the Government that only
the real part of interest (above inflation) be taxed. It
has been recognised for almost a hundred years that taxing
the part of interest income that compensates for inflation
is in effect taxing a return of capital.

Similarly, it is
generally agreed that interest earning investments in
KiwiSaver funds are also overtaxed relative to other income
when after tax earnings are reinvested each year for many
years.

The fiscal cost of the proposed
changes

The FSC asked Robin Oliver, the former
Deputy Commissioner of IRD for Policy, to tell us the likely
fiscal cost of our proposal to tax only the interest income
above the rate of inflation in term deposits and also only
allow the tax deduction for the real part of interest.

He
concluded that the change proposed would provide around a
$500m net gain to Government revenue. The fiscal impact of
the reduction in the KiwiSaver fund tax rates so that they
reduced savers’ retirement earnings by the same proportion
as the marginal tax rates on their other income, was
separately estimated at less than $200m.

So overall the
Fair Tax for Savers proposals would initially more than pay
for themselves. Eventually the stock of KiwiSaver funds and
income would grow to the point where this was not the case
but it doesn’t seem a good argument not to do so. If we
taxed blue eyed people twice as much a brown eyed people it
would still be right to tax both equally even if it did
increase the tax paid by the brown eyed people.

Is
it too complicated?

If Israel and Mexico have
been able to make interest indexation work in the past then
it cannot sensibly be argued that we would be unable to do
so in New Zealand.

The reason we suggested that term
deposits be a starting point is that with the consumers’
price index result being issued quarterly it would be
possible to tax term deposits with a duration of 90 days to
5 years quite easily if the interest was paid quarterly and
the income tax was only applied to the real component. Our
estimate is that this would boost household after tax
incomes by around $400m a year and also remove a major tax
subsidy for the debt borrowed by business and rental
property investors.

Michael Littlewood’ s alternative
remedy for KiwiSaver would be to allow anyone to withdraw
their savings at will so they did not have to earn compound
returns which incur effective tax rates higher than the
marginal tax rate on their other income. This is just
another campaign to abolish KiwiSaver. It is as if your
surgeon tells you he can “cure” your brain tumour by
cutting off your head, it’s just that you will be dead.

Michael has been campaigning against KiwiSaver for more
than 7 years. However, the score now is 2.3 million New
Zealanders having voluntarily joined and Michael Littlewood
still opposed.

Michael needs to say why he wants
KiwiSavers and term deposit holders to continue paying
unfair levels of tax because they are invested in
compounding interest products whereas if they were invested
in debt financed rental property they would be heavily tax
subsidised.

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